Is It Time For Commodities Yet?

Most of us have been on the investment sidelines a while with respect to energy and other commodities. Most of us also realize that the chance of energy and other commodities staying as low as they are now is twofold; slim and none. So when is a good time to get in?

First, I’ll look at the number one rule of investing, which is simply to “buy low.” Commodity prices have rebounded a bit from recent lows. Is that enough reason to get back in? Probably not. Yet.

Consider the oil business. The biggest problem in oil right now is oversupply. OPEC is currently meeting, and the market seems to believe that they will announce that production will not be cut back to seek balance. That would result in a continuation of the excess supply.

The recent supply glut has been caused by the years-long ramping up of domestic production, both on land and in water. That has stopped and reversed, and today the drilling rig count in the Gulf is down 60%. We now see layoffs happening in Louisiana, Texas, Oklahoma, South Dakota and Montana. This will eventually reduce supply, while demand will most likely be strong through the summer driving season.

The best market mechanism for any commodity is supply and demand, and nowhere is it more evident than in the oil business. When the price of oil is low, consumers buy more, and producers cut back. When those behaviors have had time to take effect, equilibrium will be restored, and pricing will become more “normal.”

What is normal in the oil business? For decades now the average price of oil, expressed in gold, is 15 barrels of oil per ounce of gold. That ratio stands today at about 19.7 barrels per ounce of gold. Conclusion? Either oil is cheap or gold is expensive. I believe that there will be a gradual return to the average, but only when the supply/demand situation is eventually corrected.

When should we get back in? Watch for indications that production is starting up again domestically. At that time, the insiders believe we will be rewarded by more predictable. Remember, patience is a virtue.

Remember to listen to The Van Wie Financial Hour every Saturday morning from 10:00 to 11:00 on AM600 and FM100.3, The Answer. If you have questions, call us during the show at 904.222.TALK (8255).